It’s OK to Bank on Bankrate

by Lawrence Meyers | August 1, 2013 7:00 am

What does one make of a stock that rockets up 17% on earnings that, frankly, are pretty dispiriting?

Well, that’s the case with Bankrate (RATE[1]).

Many years ago, I stumbled across this company. As personal finance websites go, I was really impressed. As the years went by, Bankrate’s content got even better, and I realized you could apply for all kinds of financial products through the website.

As I have since learned, this is the key to their entire business model. It’s called “lead generation.” Every time you fill out any form on any website — particularly with Bankrate — that information is sold as a “lead.” If you are a fan of David Mamet’s Glengarry Glen Ross, then you know how important leads are. Whoever buys those leads is going to try and convert it into a sale.

Bankrate also makes money by allowing financial services companies to advertise on its website and using hyperlinks for their advertisers.

To make all that money, Bankrate had to build its brand, and has done so fabulously over the years. It isn’t just content, but also that it aggregates rate information from over 4,800 institutions on more than 300 financial products. They cover every important local market with — ready for this? — a combined 172,000 distinct rate tables. RATE has other websites it owns or operates, and ends up generating over 150 million visits a year. It also syndicates its content to 175 other major websites like Yahoo (YHOO[2]), AOL (AOL[3]), CNBC, Bloomberg and 100 newspapers.

Content is king, folks, and if you’re content is good, other media outlets come running.

But since going public, Bankrate has been struggling. It hasn’t been growing, although it throws off very nice cash flow. Investors are giving its earnings report — released a couple days ago — a strange response, bidding the stock up about 15% since Monday (including a couple days of cooling off) on rather crappy results, apparently pinning their hopes on the future.

Revenue for the second quarter was down 14% year-over-year to $105.5 million. Second-quarter adjusted EBITDA of $26.2 million was 30% lower. Even worse, adjusted EBITDA margin in the second quarter was 24.8%, compared to 30.7% in 2012’s Q2. Bankrate posted a loss of $900,000, or 1 cent per share vs. net income of $16.3 million last year, or equivalent to 16 cents per share.

When you drill down into the numbers, lead revenue was down 15%, driven by a 40% decrease in insurance lead revenue. Display advertising was flat, CPC revenue was down 15%. This appears to be the result of banks offering CD and deposit rates near zero, so why shop for these yields when they don’t exist?

None of this is good, except that credit card lead generation revenue was up 25% and overall traffic was up 20%. I guess investors are excited about their soon-to-be-launched click-to-call platform, where people can get customizable and binding quotes.

Or maybe they like that the company is moving into the health insurance lead gen business.

Or maybe they are keen on the company’s guidance, which suggests continued improvement in credit cards and insurance.

Or maybe they just love the cash flow. The company’s free cash has been improving every year, from $27 million in 2010 to $42 million in 2011, to $64 million in 2012, and $54 million already year-to-date.

There might be another factor in the back of everyone’s mind, though …

A cash flow business like this just happens to fit the model of a certain 800-pound gorilla that loves to buy these businesses. That would be Barry Diller of IAC/InterActiveCorp (IACI[4]). That entire holding company was cobbled together by finding the best of the e-commerce and e-content platforms. It wouldn’t surprise me if there was some acquisition premium built in to the stock. I think, therefore, that Bankrate adds up to a speculative buy for this investor.

I’m not convinced about the company’s new growth initiatives, but I love the cash flow, and an IAC purchase would make sense.

As of this writing, Lawrence Meyers[5] did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc.[6], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[7] and blogs about public policy, journalistic integrity, popular culture, and world affairs[8]. Contact him at pdlcapital66@gmail.com[9] and follow his tweets @ichabodscranium.